This is an extract from a recent paper “Clean energy innovation in China: fact and fiction, and implications for the future” by The Oxford Institute for Energy Studies. 

Government policy has played a central role in China’s stunning success in expanding its clean energy industries. China’s largest clean energy sectors – namely wind, solar PV, batteries, and new energy vehicles – straddle the line between being state-owned and the market economy. China’s central government began targeting manufacturing in each of these clean energy fields for various forms of support, initially starting with pilot projects or narrow efforts to popularize technologies in small niches, such as rural electrification for solar PV, or buses as EVs. The government also supported the localization of technology through domestic content requirements and policies to encourage or mandate technology transfer, and eventually promoted the rapid expansion of these technologies through various demand-pull policies such as feed-in tariffs, quotas, or planning targets. Supportive policies have varied by technology, sometimes based on examples adapted from abroad. In other cases, incentives were either novel or adapted from existing support mechanisms.

Solar and wind supported by feed-in tariffs, targets, and mandates 

At the end of 2023, China had a total installed solar capacity of 610 GW, having grown by 55 per cent over that year. The growth in China’s solar installations in 2023 of over 200 GW accounted for over half the world’s total. For over a decade, China has dominated the manufacture of solar PV equipment. As of 2021, the International Energy Agency estimated China’s share of global production of polysilicon as 79 per cent, wafers 97 per cent, cells 85 per cent, and solar PV modules 75 per cent. Ongoing investment implies China will continue to retain an 80 per cent share in these fields through 2026, according to a 2023 estimate. In the wind power market, China has also long held the record in total installations and in the size of its domestic market. China’s wind capacity reached 441 GW at year-end 2023, with additional annual capacity reaching over 60 GW.

However, on the manufacturing side, although China’s domestic market was almost exclusively supplied by domestic manufacturers, China has only recently achieved a dominant position in global markets, accounting for over half of global wind turbine manufacturing in 2022. For major wind components, such as castings, forgings, slewing bearings, towers, and flanges, China’s share exceeds 70 per cent. In offshore wind, where China had lagged Europe for years, larger turbines and domestic feed-in tariffs have led to an explosion in growth, and China has accounted for over half of global additional offshore capacity every year since 2021. China accounts for over 90 per cent of wind turbine installation vessels under construction, and Chinese firms are capable of building offshore wind turbines with world-leading sizes of 16-18 MW – though the size of turbines and blades along with local content requirements make local manufacturing cheaper for many regions such as Europe. In addition, China also accounts for a large share of permanent magnets needed for many of the largest turbines, especially those used for offshore wind.

These achievements build on decades of government support. China’s central government began to explore research and policies to promote wind and solar power in the 1990s, and deployed solar in poor rural areas as an electrification and development strategy. Its first major steps at large-scale deployment began with the adoption of the Renewable Energy Law in 2005 , the 2007 Mid-to-Long Term Renewable Energy Development Plan, and the participation of China’s nascent wind power sector in the Clean Development Mechanism (CDM), an international program under the Kyoto Protocol to promote clean energy investment in developing countries. In the mid-2000s, China captured the majority of CDM-supported wind energy funding, and 74 per cent of China’s wind projects were supported under the CDM scheme. The first subsidized feed-in tariff was adopted for wind in 2009, and set at relatively generous levels that encouraged rapid growth in domestic deployment, aided by a local content requirement.

Solar PV has followed a somewhat different path from that of wind power. Though government policy encouraged solar manufacturing as a strategic industry, production was geared mainly for export. Local governments did subsidize the scale-up of manufacturing via low-cost loans, and in some cases shared costs for new manufacturing plants. Seeing solar as a strategic industry targeted for national support, local officials intervened with banks to offer low-cost loans for expansion even during periods of overcapacity. Local governments also offered solar firms that established manufacturing or research centres guaranteed purchase agreements to backstop loans and support their expansion; for example, Suzhou offered to install Canadian Solar panels on rooftops across a new urban zone it had established in exchange for establishing such a centre. The central government also provided low-cost financing and subsidies for the solar manufacturing industry. Solar was among the industries targeted for government stimulus loans in the wake of the global financial crisis of 2008, with decisions about which industries to promote left partly in the hands of local officials. Jiangsu and the China Development Bank offered RMB 10 billion in low-cost loans to solar manufacturing in this period, for example.

The solar manufacturing industry also benefited from positive signals from the central government, such as designating solar as a strategic emerging industry, and setting and revising upwards aggressive targets for new capacity additions. Later, as prices for PV declined, government regulators steadily reduced and then eliminated subsidized feed-in tariffs for new utility-scale solar projects, but kept them in place for targeted fields such as distributed solar. To encourage project developers and manufacturers to upgrade to the latest, most efficient technologies, in 2016 the government established requirements for certain projects to undergo tendering, with some projects to go to more companies designated as ‘Top Runners’ based on performance and quality. This encouraged companies to compete on both price and quality, while winnowing out local players that were surviving mainly on preferential treatment and support from local government

Stationary batteries promoted recently for renewable integration

In several respects, battery manufacturing in China has followed a similar development trajectory to that of solar PV. China’s battery industry began to expand rapidly in the early 2000s as major Asian manufacturers, particularly Korean and Japanese firms, set up manufacturing lines to take advantage of major electronics industry clusters that had already emerged along China’s coastal regions. Subsequently, China’s battery manufacturing capacity began to rise as new domestic entrants came into the market – especially Ningde, China-based CATL, now the world’s leading battery maker. As with solar, falling prices and a policy focus on energy storage as a strategic emerging industry have led to greater efforts to deploy energy storage domestically, including in vehicles and stationary storage. Electric vehicle policies, discussed below, played a major role in promoting domestic battery manufacturing. 

Stationary storage has also been a particular emphasis of power sector policy since 2020, as more provinces introduce requirements for new wind and solar projects to include storage, and the central government promotes integrated projects combining these technologies. Given the present structure of China’s electricity markets, and the relative cost advantage of pumped hydro storage, battery energy storage is not currently economical as a stand-alone application. Nevertheless, China’s domestic installations of stationary battery energy storage in 2023 nearly tripled from the prior year, reaching 31 GW, up from 13 GW in 2022, and already ahead of targets set by the National Energy Administration (NEA) as recently as 2021. China’s battery industry continued to expand both capacity and output in 2023, both for domestic demand and exports, and to satisfy vehicle and stationary battery markets. Overall output surged over 40 per cent to 778 GWh, of which only half was used domestically, with much of the remainder going to export markets. The industry’s expansion remains a major focus of policies at the local level, with several provinces pursuing battery manufacturing as a development strategy going into 2024.

Electric vehicle policy began early, but accelerated only when industry achieved success 

In the field of new energy vehicles, which since 2010 has grown in tandem with battery manufacturing and become the dominant consumer and source of growth for batteries in that time, China has seen an even more impressive expansion. By the end of 2023, new energy vehicles accounted for roughly 40 per cent of annual domestic passenger vehicle sales, far ahead of government targets for New Energy Vehicles (NEVs) to reach a 20 per cent share by 2025. Overall domestic sales of over 8 million grew by 33 per cent in 2023, and by an impressive 110 per cent in 2022. While the Chinese vehicle industry has suggested the domestic NEV market share will reach 40 per cent for the full year of 2024, past experience and current EV manufacturer plans suggest the reality could surprise by being even further to the upside. In terms of both numbers and market penetration, China has the largest EV market, and the country has become a major exporter of EVs to both Europe and the developing world, especially Southeast Asia. While many of China’s exports are made-in-China Tesla vehicles, domestic Chinese brands have recently gained a foothold in several regions, as diverse as New Zealand, the Middle East, Southeast Asia, and Europe.

China’s success in the fields of batteries and electric vehicles is more recent than that of wind and solar, and shows both similarities and differences. The role of public policy has been prominent in all cases. Policy-makers began to promote EVs in the early 2000s, on the advice of leading officials who argued international automakers were lagging in this field and that China could build on its competitive advantages in manufacturing to leapfrog ahead of foreign players. This resulted in the inclusion of NEVs in China’s Mid-to-Long-Term Development Plan for Science and Technology 2006-2020, as well as the launching of several pilot programs at the local level, particularly in the use of buses. Electric buses and taxis were also piloted in the lead-up to the 2008 Beijing Olympic Games. Major battery technologies were also listed in government catalogues of R&D priorities. Chinese firms were encouraged to invest in R&D centers abroad and to acquire technologies.

The speed and success of these efforts gave policymakers confidence that China held comparative advantages in the field and could successfully localize EV and battery manufacturing and technology, and led to the adoption of additional policies, such as the more ambitious local EV pilots under the ‘Tens of Cities, Thousands of Vehicles’ program. For EVs and batteries, subsidies have also played a major role, and probably helped spur local government interest in switching to EVs. China’s largest EV maker, BYD, is estimated to have received $2.6 billion in subsidies from 2007 to 2022. According to one estimate, China’s EV industry has received subsidies of $47 billion since 2009. This includes tax breaks and purchase subsidies for NEVs, and also low-cost loans and other direct support to battery and EV makers.

R&D funding and supporting policies steadily ramped up

For wind, solar, batteries and EVs, innovation has been critical, and to some extent, this innovation has been guided and driven by the government. Innovation and R&D have been key policy priorities of the central government, and were increasingly highlighted in Five-Year Planning documents going back to 2000, and especially since 2011, when the 12th Five-Year Plan included specific targets related to indigenous innovation, including R&D funding as a share of GDP, patenting, and educational achievement. Innovation and R&D have also been steadily boosted in key plans and programs, such as the 1986 ‘National High-Tech R&D Program’, the 1997 ‘National Basic Research Program’, and the 2006 ‘Medium-to-Long-term Program for Science and Technology Development’. China’s estimated public and private R&D spending as a share of GDP is comparable with those of many advanced economies, albeit below that of the US – and has shown a consistent rise over the past decade. During the 14th Five-Year Plan, the government set a goal of increasing R&D spending by 7 per cent annually. China’s government R&D spending is especially strong in the energy sector, where its share of the global total government R&D spending on energy has risen from 25 per cent in 2019 to over 34 per cent in 2023, larger than any other country or region. 

The central government coordinates R&D activities at various levels, including directly funding strategic research fields under various State Key Laboratories, at universities, and stateowned enterprises (SOEs). Generally, funding research priorities are coordinated by the Ministry of Science and Technology (MOST), but all top ministries, including the National Development Reform Commission (NDRC) and the NEA, contribute to setting research priorities and guiding investment in fields under their purview. Local governments and state-owned banks are also guided to support firms engaged in R&D in strategic fields. Local policy-makers have increasingly looked to clean energy manufacturing as a way to boost employment and tax revenues, and show progress towards the level of industrial upgrading desired by the central government. Especially since the real estate sector and revenues from land sales fell off markedly in 2023, local governments have focused even more on clean energy as a growth strategy. This trend appears set to continue through 2024, based on provincial and local development plans.

Clean energy policy continuity aided industrial transition, with occasional abrupt shifts

While this brief outline of the key supportive policies and various forms of central and local subsidies suggests overall similarity and continuity, policies have in some cases lagged developments in industry, or evolved over time in response to developments at home or abroad. Chinese energy and industrial policies have guided both investment and innovation – playing the lead role in the guidance of search that scholars have long identified as a key variable in technology innovation systems. While China has adopted a sequence of far-sighted strategic industrial policies and followed up with high levels of administrative and financial support, the consistency of China’s support policies should not be exaggerated. Each of the clean energy sectors China now dominates has undergone booms, busts, and periods of stagnation as a result of short-term policy shifts, such as the sudden and devastating overnight cut to solar feed-in tariffs in 2019 known as the ‘May 31’ policy, or the 2016 investigation of subsidy fraud in the EV and battery space that led to major changes in that program and slowed the NEV market for a time.

While there have been ups and downs, however, China has never undergone a significant policy-driven clean energy deployment slowdown comparable to those seen in some European countries or the US over the past two decades. In some clean energy sectors, such as biofuels for example, where industry scale-up has been more difficult or costly than expected, policy support has dwindled over time. The success of wind, solar, battery and EV technology policies has not been linear, nor have policy developments always gone according to plan. Coordination between central and local government has often proven difficult. The central government has at various times instituted limits on provincial build-outs of wind and solar, criticized local governments for starting too many low-quality manufacturers to capture subsidies, tamped down on overcapacity and forced locally-supported clean energy industries to consolidate, compelled provinces to purchase renewable energy, or outright intervened to crack down on subsidy fraud. Some policies, such as the original design of the green energy certificate, have failed outright.

However, clean energy technology in China benefitted from other aspects that aided its scale-up and promoted successful learning and innovation. The three other aspects of China’s success are: resilient and adaptive supply chains, strong links with global innovation networks, and human capital in key fields.

Access the complete paper here